The JOBS Act Provides Opportunities for Community Banks

The U. S. House of Representatives overwhelmingly passed the JOBS (Jumpstart Our Business Startups) Act Tuesday, March 27, after receiving it from the Senate. The President signed the bill April 5, 2012. The JOBS Act is best known for its crowdfunding provisions, which I will address shortly, but it also is a boon to many community banks. Community banks often are formed with many investors. Some state regulators encourage maximizing local shareholders, because local bank shareholders often do business with the bank they own. Banks and holding companies become “public” and must file with their federal regulator (banks) or the SEC (holding companies) when the shareholders of record exceed 500. Even banks with fewer shareholders at formation, over time, through sales and inheritance, find themselves over the 500 shareholder limit. Accordingly, a large number of community banks and bank holding companies must file periodic reports with either the SEC or the federal regulator, in addition to call reports and other filings with the state and federal regulator. As public companies, Sarbannes Oxley and difficult provisions in Dodd Frank, in addition to SEC regulations, apply to these banks. The added regulatory burden for this can be hundreds of thousands of dollars each year. Adding this on top of a stagnant economy, low interest rates, declining real estate values and a soft lending market, makes it very difficult for community banks to turn a profit.

Good News for Community Banks
The JOBS Act increases the threshold for SEC registration and periodic filing from 500 shareholders of record to 2,000. Banks approaching the 500 shareholder threshold will be relieved. In addition, banks now have room to maneuver if they were considering a bank combination but did not want the transaction to create a public company, with all the associated fees and added compliance. Perhaps more important, the Act increases the threshold for SEC deregistration (“going dark”) from 300 shareholders of record to 1200. This permits any community bank (or holding company) that can certify that it has fewer than 1200 shareholders of record to deregister as a public company. The process is simple, and we will go through that in our next newsletter. If you are an officer or director of a bank or holding company that has between 500 and 1200 shareholders, you should look at this carefully. If you are over 1200 shareholders but under 1500, it may be worth studying your shareholder list carefully to find instances where a single shareholder has multiple accounts, each treated differently. You also might consider a “reverse stock split,” which is a transaction in which you trade some lower number of stock for a higher number and then cash out the fractional shares. For example, if you wanted to eliminate all shareholders with fewer than 10 shares, you would do a 1 for 10 reverse split, giving every shareholder 1 share for each 10, and redeeming (buying back) the shares from those owning fewer than 10 shares. Of course, you must have the required capital to do this. There are other techniques for reducing your shareholder number, and our attorneys would be happy to discuss this with you. Unfortunately, the SEC has a year to draft Regs implementing this part of the Act. The ABA and ICBA are lobbying for the SEC to move more quickly with this process or to suspend the imminent requirements of XBRL for many public banks. Otherwise, many bank holding companies will incur the wasted cost of implementing XBRL for a few quarters until they qualify to “go dark.”

Other Implications of the Act
The Act also makes it much easier for start-up companies to sell stock. First, filing requirements have been reduced meaningfully for any company that qualifies as an “emerging growth company” (“EGC”). In addition, pre-IPO EGCs may submit a confidential draft of the registration statement to the SEC for comment. This is a big advantage for these companies, because they discover on a confidential basis what the SEC believes is insufficient in the filing. Non-public companies also have an expanded right to file exempt offerings. Specifically, the maximum for exempt filings under Regulation D will grow from $5 million now to $50 million. Currently, any sale that is not to an “accredited investor” counts against the 35 shareholder limit in certain types of “Reg D” filings. In most cases, an accredited investor has over $1 million net worth or she, with her spouse, earned in the past and expects to earn at least $300,000 in the fiscal year. The Act provides an exemption for sales amounting to less than $1 million in 12 months, so long as the individual investments are limited to the greater of $2,000 or 5% of the person’s annual income or net worth for people earning less than $100,000; or the greater of $100,000 or 10% of annual income or net worth for those earning over $100,000. Some in Congress are concerned that this will provide more opportunity for the “pump and dump” stock scams common in the 1990’s. They may be correct. Community banks and holding companies may use this act on a sort of “rolling” basis to augment capital. It also may reduce traditional lending opportunities for some banks. Many founders of start-up companies now fund initially by renegotiating their mortgages with their local bank. Or their parents or siblings do. Or they take out an SBA loan secured by equity in the home. The Act will provide an alternative means for these start-ups to raise funds, especially since the Act anticipates that many companies will be raising this money on the internet. Banks, particularly in technology hotbeds, may not see these loans in the future.

There are many other aspects of the JOBS Act. If you have questions or have heard that some other part of the Act may affect your institution, please do not hesitate to contact us.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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